Accounting for Financial Instruments: More Turmoil Ahead

Joseph M. Langmead, MBA, STD, CPA, and Jalal Soroosh, PhD, CMA

The global financial crisis has brought considerable focus on the accounting model for financial instruments, both in the United States and around the world. The significant rise in the volumes of asset securitizations and derivative financial instrument transactions has served to bring attention to particular features of accounting standards that seem counterintuitive to some and counterproductive to others. The more controversial features include the ease with which securitizations remove assets from balance sheets and the minimal income statement consequences of many accounting provisions. But the harshest criticisms often relate to the substantial use of fair value accounting for many financial instruments. With the issuance of its most recent exposure draft on these subjects, FASB has ensured that the controversy will persist.